In a nation that prides itself on green credentials — from electric cars to extensive parklands and rubbish recycling — it’s no wonder that concern about the environment is reaching into the realm of finance.

So-called “green finance,” which adds eco-concerns to the mix of factors that determine a good investment, first appeared in China in late 2015. As the practice celebrates its second anniversary, we look back at how the concept has evolved.

From zero to hero: 2016

China ascended to the throne of the world’s bond market, issuing 230 billion yuan (US$34.7 billion) in green notes that accounted for two-fifths of global issuance that year.

The debt form came as China, laboring under a pall of smog in many major cities, called for growth strategies that pay homage to a cleaner environment and healthier lifestyle.

Green bonds have stood out as a valuable tool to mobilize the global investment community. They are distinguished from regular bonds by one major feature: proceeds are earmarked for projects with environmental benefits, according to the China Green Bond Market Report 2016 issued by the Climate Bonds Initiative and the China Central Depository & Clearing Co.

The first green bonds hit the world stage in 2007-08, led by multilateral institutions like the World Bank and the European Investment Bank. The first corporate green bond was issued in 2013.

China made its debut in the sector two years ago when the Agricultural Bank of China issued a green bond on the London Stock Exchange. At the end of 2015, the People’s Bank of China and the National Development and Reform Commission separately published guidelines to define and regulate green bonds.

Since then, the world’s second-largest economy has moved into the fast lane on the green debt market. Commercial lenders, led by big players such as Shanghai Pudong Development Bank, Industrial Bank and the Bank of Communications, dominated Chinese green bond sales in 2016.

A late flourish: 2017

Due to tightened liquidity and domestic interest rate volatility that drove funding costs higher, the green bond market got off to a slow start this year. Sales for the first three months stood at US$3.68 billion.

However, the market rallied in the second quarter, when issuance doubled and issuers became more diversified. In the first half of the year, more than a third of green bonds were sold by non-financial corporates.

In the third quarter, the market expanded rapidly as more local entities became involved, including smaller city banks and local government financing vehicles. Newly created green finance pilot zones also tapped the market.

The July-September period registered sales of 62.3 billion yuan, with 38 issuers and 43 green bonds. As of September 30, accumulated sales of Chinese green bonds totaled 141.8 billion yuan, accounting for more than a fifth of global green debt.

Despite such a valiant performance, China was beaten to the world’s No. 1 spot by Mexico, which emerged as a black horse in the green bond market, according to Climate Bonds Initiative.

What’s next: 2018

After a bumper year in 2016 and more of a mixed picture of 2017, the green debt market in China is moving into its third year amid plans to make the market even more attractive.

“Both investors and issuers are waiting for a more harmonized set of standards on what is green,” the banker noted.

Ma Jun, director of the Center for Finance and Development at the Tsinghua National Institute for Financial Research, said the nation is accelerating efforts to coordinate its green bonds with global standards.

“The green bond market is set to keep growing and its prospects remain broad,” he told a recent seminar hosted by Green Finance Committee of China Society for Finance and Banking and China Energy Conservation and Environmental Protection Group.

Although China ranks third in the global bond market, only 2 percent of all its bonds are foreign-owned. Increasing that ratio remains a challenge.

“Globally, green bonds in 2017 were a European market, with 40 percent of issuance in euros,” said Ricco Zhang, Asia-Pacific director of the International Capital Market Association. “In the future, China needs to work closely with European countries to attract more foreign investors for its bonds.”

China is forecast to invest US$2.2 trillion in six “sustainability” sectors by 2020, according to consultancy ENEA. For global investors looking to participate in the nation’s “green revolution,” a growing range of index-linked products are coming to market under the green theme, said BNP Paribas in a recent report.

As a matchmaker between the global investors and Chinese local market, Deutsche Bank Group participated in two major cross-boarder green bond offerings in 2017.

The transactions of China Development Bank and China Three Gorges Corporation attracted “active participation” by European investors, which made up around two thirds of the investor base, according to Samuel Fischer, Deutsche Bank Head of FSG Origination, China.

“We believe that 2018 will set a new high water mark for the country’s green bond market development. More and more Chinese green bond issuers in the domestic yuan market will concurrently access the international markets in the future,” Samuel said.

“Correspondingly, international investors looking to enter China’s domestic yuan bond markets are also likely to prioritize green bonds,” he added.